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9/06/2012 @ 6:01PM10,821 views

At Navistar, 'No Disasters' Means It's A Good Day

When the best an analyst can tell investors about a company’s quarterly results is that there were “no disasters,” expectations must be pretty low.

Indeed, that’s exactly what analyst Joel Tiss of BMO Capital Markets wrote in a note to clients Thursday, after Navistar International reported a $100 million pre-tax loss for the third quarter. With investors bracing for the worst after a costly strategic mistake by the company, the magnitude of Navistar’s loss didn’t seem too bad. The company’s shares climbed 17.4% to close at $23.97.

But much bigger issues are still looming for the storied manufacturer of heavy-trucks and engines. After abandoning a failed engine emissions strategy in July, Navistar must transition to new engines, requiring heavy investment at a time when its balance sheet is stretched and truck sales are slower than expected. The company has yet to say how much that transition will cost, and whether it will write off any of its $700 million investment in the failed engine technology.

In his first conference call with investors, Navistar’s new chief executive, Lewis B. Campbell, minced no words in describing the challenge ahead. “Look, there’s no doubt that we have, as some would say, some really big boulders in the stream. But as you can imagine, I did plenty of due diligence and while there are a host of issues that need to be resolved, there was nothing I felt was insurmountable when deciding whether or not to pursue this opportunity,” said Campbell, who took over as CEO on Aug. 27 after his predecessor, Daniel Ustian, was forced to retire.

“We’re already finalizing a strong 18-month operating plan that we will be putting in place throughout the balance of Q4 and I believe we will have the proper metrics including ROIC (return on invested capital) put in place to help ensure our success. But I do believe we have to accelerate the pace of progress on the improvements needed so that we can quickly resume our rightful place as a profitable leader in the industry.”

Exactly what that plan is — and more important, whether it will be successful — remains to be seen. Navistar is still burning cash at an alarming rate and heavy-truck sales are slowing down at precisely the wrong time. The recovery plan, created by chief operating officer Troy Clarke and now being tweaked by Campbell, will be reviewed by Navistar’s board of directors in October.

But with investors hungry for evidence of stability, if not the beginnings of a turnaround, Campbell did reveal a few details on Thursday:

Navistar aims to reduce costs by $150 million to $175 million a year, starting in fiscal year 2013, by cutting discretionary spending, reducing material costs and eliminating jobs.

Some 500 people accepted buyout offers; 200 more jobs will be eliminated through layoffs, generating $70 million to $80 million (or almost half) of the annual savings target.

The company is reviewing its non-core assets (everything except its North American truck, engine and parts business) for possible sale. That would include its recently acquired Monaco RV unit, its IC school bus division and even its Navistar Defense business, as well as several foreign joint ventures.

To conserve cash, Navistar is cutting capital spending and curtailing investments outside North America. It’s pouring all of its engineering resources into the new engines, and frozen other projects.

Navistar aims to begin production of its most popular 13-liter engines, using Cummins’ selective catalytic reduction (SCR) technology, in April 2013.

“We’re dedicated to hit each of our launch target dates, and we believe that as we begin to implement our clean engine strategy, we will begin to regain our rightful market share and eventually add to it,” Campbell said. He predicted investors will begin seeing evidence of a recovery in fiscal 2013.

Until then, it will be dicey. The company said it has $1.35 billion in cash after taking out a $1 billion loan, and will end the year with approximately $950 million, implying it will use $400 million during the fourth quarter. Deutsche Bank estimates Navistar requires at least $500 million in cash on hand to fund its operations, and says it is likely the company will continue to burn cash during the first half of 2013.

Chief Financial Officer A.J. Cederoth said before taking out the new loan, Navistar developed “multiple stress-tested scenarios” in order to understand its cash needs, and believes it has adequate liquidity. But the biggest variable, he said, is sales volume. It not only drives earnings, but also has a significant impact on working capital, which is expected to be $100 million lower in the fourth quarter.

“With the revised engine strategy and the shift to SCR, which includes the introduction of the Cummins 15-liter engine, coupled with the performance of our vehicles, we expect that our market share will recover and that we will return to profitability,” he said. “But this will take some time. Until then, cash management will be very important.”

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